Material Ledger is SAP’s solution to performing actual costing. It is supposed to contain the benefits (without inheriting the disadvantages) of the two traditional methods of inventory valuation - Standard Costing and Moving Average Costing. Before you can understand the functionality of Material Ledger, it is always good to start with some of the characteristics of these two traditional approaches.
Standard costing is an effective method of obtaining stable prices for your materials which can be benchmarked against any price fluctuations.
Moving Average Costing is a good method of keeping your material costs up to date, particularly in cases where the prices keep fluctuating. Each time you perform a goods or invoice receipt, the moving average price is updated based on the total inventory value (taking the latest purchased price into account) and dividing it by the total inventory quantity. One of the weaknesses of moving average costing is that the new price is only posted back to inventory if there is enough inventory quantity to cover the difference. This could be the case if you consume a material between the time that you receive it and when you invoice it, and the invoice price is different from the goods receipt price. If the invoice is for a quantity that is greater than the amount of the material left in inventory, the difference between the invoice and goods receipt will not fully be allocated back into inventory. Instead, only the portion that relates to the existing inventory quantity will be allocated back to inventory and the remainder will be posted to the price variance account. This means that if you looked at the Moving Average price for that material, it will not represent the true current price.
Material Ledger’s two main objectives are:
(1) Inventory Valuation in up to three currencies and valuation methods
(2) Performing Actual Costing for Materials
The real beauty of material ledger is number (2). This is because it takes the variances that occur from inventory transactions and post them back to ending inventories in order to value them at an actual cost. It does this while retaining the standard cost of the material as a benchmark. You also have the option of revaluing the current standard cost with the periodic unit price (which is the actual cost calculated by material ledger). The two types of price determination that occur with material ledger:
(1) Single-level price determination: This takes the variances that occur for an individual material and roll them back into its ending inventory.
(2) Multilevel price determination: This takes the variances that occur for a lower-level product (e.g. raw material) and roll them (in the proportion of consumed quantity) into a higher-level product (e.g. finished product).
You can choose to roll the variances that relate to sold inventory, into the cost of sales account in order to value COS at actual costs. This involves using Material Ledger’s “Revaluation of Consumption” functionality. With Material Ledger, you can therefore achieve actual costs for ending inventory of single and multilevel products and cost of sales, and still measure your procurement processes according to standard costs.